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Chicago Board Options Exchange Manipulation of VIX Index Class Action

The complaint for this antitrust class action claims that the Volaility Index, or VIX, has been artificially manipulated to provide results profitable to certain investors.

Two classes have been proposed for this action.

The VIX Futures and Options Class is all persons or entities who had transactions in VIX futures or options in the US, between January 1, 2009 and the end of the anticompetitive conduct.

The VIX Exchange-Traded Products Class is all persons or entities who traded VIX exchange-traded products on an exchange in the US, between January 1, 2009 and the end of the anticompetitive conduct.

VIX is a benchmark index created by CBOE Exchange, Inc., a subsidiary of CBOE Global Markets. It is meant to be an indicator “of market sentiment and volatility” according to the complaint, measuring expected thirty-day market volatility based on the price of Standard & Poors 500 Index options contracts.

Investors cannot trade VIX, but they can trade instruments linked to VIX, such as VIX futures, VIX options, or other products based on the index. Financial institutions may issue exchange-traded funds and exchange-traded notes (ETFs and ETNs) linked to the price of VIX futures. The complaint quotes federal law saying that CBOE can only list contracts “that are not readily susceptible to manipulation.”

However, the complaint claims that the prices of VIX-linked instruments can be manipulated—not directly, but by manipulating the SPX options market, the source for the calculation of VIX.

There is, it says a “monthly trading window in which the VIX price used to settle expiring VIX futures and VIX options is calculated.” Professor John M. Griffin of the McCombs School of Business at the University of Texas at Austin published a research paper observing “statistically and economically significant trading volume spikes” in SPX options during this window. Griffin says, “The most natural explanation for these patterns appears to be attempted manipulation.”

An anonymous whistleblower also sent a letter to the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) claiming that “trading firms with sophisticated algorithms” can move the VIX up or down simply by posting quotes on SPX options, “without needing to physically engage in any trading or deploying any capital.” The Financial Industry Regulatory Authority (FINRA) is now taking a closer look at the situation.

The complaint brings this action against CBOE Exchange, CBOE Global Markets, CBOE Futures Exchange, and various John Does. It claims a number of violations of the Sherman Antitrust Act, and also of the Commodity Exchange Act, such as false reporting and deceit.